Some of Australia’s leading bond experts are considering increasing their holdings of bonds in response to the recent global bond rout, which has spurred yields sharply higher.

“We have been neutral bonds for a while now but we are thinking of changing that,"
BT Investment Management
head of income and fixed interest
Vimal Gor
said; recent volatility in bond markets had made government debt more attractive.

Since the start of May, when speculation intensified over the United States Federal Reserve Bank unwinding its massive bond buying activity, Australian government three-year bond yields have shot up 9.5 per cent to roughly 2.8 per cent, and 10-year bond yields are up 22.85 per cent to 3.8 per cent.

“What we are seeing is a large positioning sell-off and this has pushed bond yields to quite attractive levels. But on a long-term view you wouldn’t be aggressively buying them," Mr Gor said. “I think bonds are attractive on a short-term view (three months), but I am neutral on a medium-term view (three months to three years) and bearish on a long-term (five year) view."

AFR
AFR

Kapstream Capital
managing director
Kumar Palghat
also believes that government bond yields look attractive in the short term given their recent rise.

“We were underweight bonds prior to [Fed chairman Ben] Bernanke’s recent comments but we have now increased our holdings because we think the market has gone too far," Mr Palghat said.

While it is a risky time to buy into bond markets there are opportunities, said
Citigroup
head of G10 rates strategy APAC
Steve Mansell
. “Aussie bonds are a buy as compared to US bonds. Most of the opportunities in bonds are in the shorter part of the yield curve." At the moment Mr Mansell favours three-year bonds.

“There is good reason to favour three year bonds," agreed
HSBC
regional head of rates
Andre De Silva
. “Because of the carry, three year bonds offer a better risk-reward consideration at this juncture."

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HSBC has a preference for eurozone, specifically German, sovereign debt, Mr De Silva said. “Sticking to high quality debt is a strategy to protect returns in a very volatile market." Citi also prefers German bonds, Mr Mansell said.

HSBC is holding five-year Japanese government bonds, but is otherwise neutral on JGBs.

With equity markets under pressure, investors are likely to seek out bonds as an alternative asset class over the next month or so, which should help to keep yields stable. However once equity market volatility starts to settle down, bond yields will rise again.

Global bond yields have risen nearly 1 per cent over the past few weeks in response to comments by Dr Bernanke about the eventual unwinding of quantitative easing.

US Treasury 10-year yields jumped to a 22-month high last week after Dr Bernanke mapped out a plan to wind back bond buying to between $US70 billion and $US75 billion a month, from the current level of $US85 billion. The massive stimulus injection has underpinned strength in global financial markets and has allowed the US economic recovery to gain traction.

Liquidity injections by global central banks have forced bond yields down and investors into riskier assets, such as the Australian dollar.

But now, the Fed’s talk about tapering has started an unwinding of carry trade positions and made many investors realise that riskier markets aren’t as appealing as they used to be.

“Bonds have been a beneficiary of the global carry trade. Every asset class has benefited from the liquidity injection. The thing with bonds is they can sell off, but if other asset classes come under stress, bonds will rally on the back of that," Mr Gor said.

“While we don’t think this is the start of a protractive bond sell-off now," Mr Gor said, “it is likely that the low in bond yields is already behind us."

With the Fed now signalling the end of asset purchases by the middle of next year, the global bond market is repricing for higher interest rates across the yield curve.

Indeed, the Australian bond market is pricing in the risk of a domestic interest rate rise within 12 months, but only if markets become disorderly.